What is the reform of the pension system announced by Boric and what will happen to the AFPs in Chile

Pioneer in individual capitalization and replicated in the 90s in much of Latin America, the now questioned Chilean private pension system could undergo important changes if the reform announced this Wednesday by the president is approved Gabriel Boric.

On national network The president announced that his proposal contemplates the creation of a mixed model with an increase in the contribution from 10 to 16% by the employer and the possibility for the State to manage the funds.

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“The AFPs, in this reform, are finished”, sentenced Boric. “There will be new private investment managers with the exclusive purpose of investing pension funds and, in addition, there will be a public alternative, which will promote competition with the entry of new actors”he pointed.

#National chain | Republic President, @GabrielBoricannounces bill of #BestPensions for Chile. https://t.co/Xh6k2dkGP4

– Government of Chile (@GobiernodeChile) November 3, 2022

Pensions have been in the ranking of the main concerns of Chileans for years and the refoundation of the system was one of the main demands in the wave of protests of October 2019, which left thirty dead and thousands injured.

According to the leftist president, through the new mixed system, “the pensions of all people” will be improved “substantially”. With the current system, 72% of pensions are less than the minimum wage (about 400 dollars), he pointed out.

The government’s proposal borikwho would enter Congress next week -where he does not have a majority- will maintain the individual savings pillar, which currently averages 10.5% of salaryand adds 6% to the employer, who until now had no participation.

The employer’s new contribution “will go to a social security fund that will improve pensions for everyone, but especially for women who are the most affected by the current system,” it was explained.

The AFPs will be replaced by a Mixed Pension Systemwith a public investment manager and private actors.

“The current pension system is in crisis, and nobody doubts that. Today’s pensions are not enough for our fathers, mothers, grandfathers, grandmothers to maintain a decent life in their old age, regardless of how much they worked during their lives “, said borik.

Once the text is approved, the new mixed system would provide substantially higher pensions than the current ones.

The president gave an example for a salary of 400,000 pesos (about 423 dollars). In the case of a man, the amount of retirement will increase 46% and 52% for women.

The new pension system proposed by the government will be financed with funds that it hopes to raise with a tax reform – a pillar of the social reform program of borik– that the president already sent to Congress last July and that seeks to capture 3.6% of the country’s total GDP.

A man passes in front of an office of the Administrator of Pension Funds (AFP) in Santiago, Chile, on July 8, 2020. (JAVIER TORRES / AFP).

QUESTIONED MODEL

Implemented by the dictatorship of Augusto Pinochet (1973-1980), the system was a pioneer in the region in establishing individual capitalization and in discarding the pay-as-you-go model.

Each formal worker is obliged to contribute 10% of their monthly salary to a personal account that they can use when they retire (60 years for women and 65 years for men) and which is supervised by one of the seven Fund Administrators. Pensions (AFP) that exist.

The AFPs, private companies regulated by the State, obtain millionaire profits after investing those savings in the markets, which add up to about 8% of Chilean GDP.

Currently there are seven AFPs that manage workers’ savingswhich at the time of joining must choose between five types of fund (A, B, C, D and E) based on their aversion to risk.

Its defenders argue that the model has contributed to the development of the national capital market. and explains in a third the greater economic growth that Chili has experienced from 1980 onwards, according to a study by the AFP Association.

His detractors, however, consider that the investments of the AFPs have exclusively benefited the elites and that the system only works if you have a stable job and a high income, something unthinkable for the vast majority of workers.

In 2008, a reform was made and a state-funded pension was created, aimed at the poorest 60% who had never contributed or who received very low pensions.

The state contribution was expanded in 2021 to 185,000 pesos per month (200 dollars).

Source: Elcomercio